[T.S.R:11616] buy aban shore

Aban Offshore-Buy; PO Rs 1976
 
Event: Aban Offshore is expected to deploy the remaining three idle rigs (Aban VII, Deep Driller 1 and 6) by November. Aban VII is said to be contracted at day rates of US$100,000/day, whereas Deep Driller 1 and 6 are said to be contracted at day rates of $150,000/day each. The details specific to the contract - clients, duration, etc are unknown.
 
Aban's management has not acknowledged any such development. The management said that they are yet in the process of marketing these rigs.
 
My View:
Pressure to ease on debt servicing
The deployment of the rigs is definitely a positive for the company not just in terms of having all the rigs contracted but also the fact that company desperately needs to generate cash flows to service its huge debt (net debt to equity of ~8x). About six months back, the company was facing serious issues in terms of seven idle assets which were putting severe pressure on its cash flows (interest cost was eating up more than half of the operating profit).
 
Deployment of these assets would considerably ease the pressure on debt servicing (we expect the interest-coverage-ratio to increase from 1.1x in FY09 to 1.5x and 2.0x in FY10 and FY11, respectively).
 
Day rates remain firm
 
At the said day rates, we believe the rigs have been deployed at reasonable rates, very much in-line with the earlier contracts (3 rigs at $180,000/day and 1 rig at $126,000/day). The heartening fact is that the company has recently been able to deploy the rigs at steady and quite lucrative day rates amid the current scenario. This also indicates that the environment for E&P activities is seen to be improving and we can expect the day rates moving northwards over the next few years.
 
Pick-up in the E&P activities
 
Over the past six months, crude prices have shown a strong recovery from ~US$ 50/bbl to ~US$ 79/bbl. Over the past year, global consumption has remained weak. It is interesting to note that during the severe global recession that we saw in the last one year, worldwide oil usage has dropped by a minuscule 2.7%. Thus, once the global economy recovers, crude oil should resume its rally.
 
When economic activity picks up, it won't take much for demand to outpace the supply, as it is much easier to increase usage, but it takes a long time to ramp up production. We, thus believe, that we may see heavy investments pouring in the E&P activities in the years ahead to reduce the demand supply gap.
 
Valuation
 
Based on our DCF valuation, we arrive at a target price of Rs 1,976.0 for the company's stock, which represents a upside potential of 25.2%. Thus, I recommend a BUY to the company's stock.

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